EM Review: Fed’s Rate Cut, Trade Hopes Ignited Relief Rallies

(Bloomberg) -- Emerging-market stocks rose for a fourth straight week last week and posted the best monthly advance since June, as the Federal Reserve confirmed investors’ expectations of a third-straight interest rate cut. While the U.S. central bank signaled a pause in further easing, appetite for higher yielding assets remained in place as signs of progress in the U.S. and China trade talks left investors more comfortable with taking risk. Developing-nation currencies strengthened for a fifth straight week.

The following is a roundup of emerging-markets news and highlights for the week ending Nov. 3.

Read here our emerging-market weekly preview, and listen to our weekly podcast here.

Highlights:

• Federal Reserve officials reduced interest rates by a quarter-percentage point for the third time this year and signaled a pause in further cuts unless the economic outlook changes materially
  • U.S. consumer spending trailed forecasts in September while weekly applications for unemployment benefits rose more than projected, offering a note of caution on the economy
  • Meanwhile, U.S. hiring was unexpectedly resilient in October and prior months saw sharp upward revisions, validating the Fed’s signal of a pause from interest-rate cuts
• China and the U.S. had a constructive conversation and achieved “consensus in principle” in a phone call between Chinese Vice Premier Liu He and U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin
  • Earlier in the week, Chinese officials were casting doubts about reaching a comprehensive long-term trade deal with the U.S. even as the two sides get close to signing a “phase one” agreement, while President Donald Trump had said the U.S. was ahead of schedule to sign a very big portion of the China deal
  • Commerce Secretary Wilbur Ross expressed optimism the U.S. would reach a “Phase One” trade deal with China this month and said licenses would be coming “very shortly” for American companies to sell components to Huawei Technologies Co. Trump on Sunday told reporters at the White House that a trade agreement, if one is completed, would be signed somewhere in the U.S.
  • China secured the World Trade Organization’s go-ahead to impose $3.6 billion in sanctions against the U.S., in a case that predates the tariff war but may add a layer of tension to ongoing talks
• Senator Marco Rubio plans legislation to block U.S. government pensions from investing in Chinese stocks after the board overseeing the funds put off a decision that would add exposure to China
• House Speaker Nancy Pelosi moved the Democrats’ impeachment inquiry of Trump into a new phase that signals the public soon will get a look at the witnesses and evidence being assembled to build a case against the president
  • Trump’s presidency stands on its most treacherous ground after the House voted to approve and proceed with its impeachment inquiry
• South Africa is heading for a debt trap as bailouts for the embattled state power utility drain the government’s coffers and anemic economic growth weighs on tax revenue
  • Finance Minister Tito Mboweni presented a rapidly deteriorating outlook in his medium-term budget policy statement, with gross government debt seen surging to 80.9% of gross domestic product in the 2028 fiscal year unless urgent action is taken
  • Eskom Holdings SOC Ltd. will receive 138 billion rand ($9.2 billion) in bailouts through March 2022, or 10 billion rand more than previously allocated
  • South Africa dodged its third junk rating Friday -- something markets had been counting on for months -- as Moody’s Investors Service maintained the nation’s lowest investment grade score but revised its outlook to negative from stable
• Fitch Ratings raised its outlook for Turkey’s sovereign assessment to stable from negative, citing an improving current account balance, continued economic growth and falling inflation
• Lebanon’s Prime Minister Saad Hariri stepped down Tuesday after two weeks of anti-government protests descended into violence
  • Calls are mounting for Lebanon to impose formal restrictions on the movement of money to defend the country’s dollar peg and prevent a run on the banks when they open their doors after nationwide protests
  • The yield on the nation’s dollar bond due 2021 climbed above 30%

Asia:

• China’s ruling Communist Party warned that internal and external risks were increasing after wrapping up its most important meeting of the year
  • A gauge of the outlook for the country’s manufacturing sector dropped to the lowest level since February, underlining the weakness of an economy buffeted by weak domestic demand, shrinking profits, and the trade war with the U.S.
• South Korea’s semiconductor inventories fell the most in more than two years in September, signaling a potential end to a prolonged slump in tech demand that has weighed on global growth
  • Samsung Electronics Co. reported earnings that beat estimates
  • FOMC rate cut will help maintain global growth trend and have positive impact on the South Korean economy, central bank Senior Deputy Governor Yoon Myun-shik said
  • Exports plunged the most in almost four years while consumer prices failed to rise for a third straight month in October, highlighting continued pain in this Asian bellwether for global trade
• The U.S. won a case against India at the World Trade Organization alleging improper use of export subsidies valued at more than $7 billion
  • India’s farmers’ organizations have planned a nationwide protest on Nov. 4 to demand that the government keep agriculture out of a 16-nation trade agreement currently being negotiated in Thailand
  • Fiscal deficit for April-September was 6.52 trillion rupees ($92 billion) versus 7 trillion rupees targeted in the budget for the financial year ending March 31
  • India is committed to further improving its people-friendly tax regime, Prime Minister Narendra Modi said, as Asia’s third-largest economy seeks to attract more overseas investment to spur growth
• The global slowdown and trade war have created an environment in which “low interest rates for longer” is the new normal, Bank Indonesia Governor Perry Warjiyo said. Separately, Warjiyo said the central bank’s monetary policy will continue to be data dependent
  • Indonesia suspended exports of nickel ore with immediate effect after a planned ban on shipments from the beginning of next year led to a rush to beat the deadline
  • The government warned it will revoke export licenses from mining companies that breach rules on shipping nickel ore as it steps up inspections ahead of an export ban
  • The country’s state budget deficit is at 1.7%-1.8% as of September, while the government sees growth at between 5.08% and 5.1% this year
• Thailand will request a dialogue with the U.S. at the East Asia Summit due in November to regain scrapped trade benefits, Keerati Rushchano, the acting director general of the Department of Foreign Trade, said
  • Prime Minister Prayuth Chan-Ocha has asked the Foreign Ministry, Labor Ministry and Commerce Ministry to start talks with the U.S. to explain the country’s stance on labor issues as the nation to set up task force to restore trade preferences
  • The value of foreign direct investment applications from China doubled during the first nine months of 2019 compared with a year earlier
  • The current-account balance narrowed in line with the trade surplus on falling gold exports
  • The central bank said third-quarter economic growth may be lower than 2.9%
• Philippines plans to offer prize bonds in November as government seeks to tap liquidity in financial market after central bank’s reserve ratio cuts, Treasurer Rosalia de Leon said
  • The Securities and Exchange Commission has asked Bangko Sentral ng Pilipinas to consider setting ceilings on the interest rates and other fees that lending and financing companies may impose
  • October inflation likely 0.5% to 1.3%, according to the central bank
• Taiwan’s economy in the third quarter grew at the fastest pace since the second quarter of last year as domestic investment and better-than-expected overseas demand helped avoid the worst of the U.S.-China trade war
  • China’s ban on individual travel to Taiwan could see visitors to the island fall for the first time since the devastating SARS outbreak of 2003. The number of mainlanders traveling to the island plunged 46% in September, according to data from Taiwan’s Tourism Bureau
  • The Financial Supervisory Commission said it is raising the risk-capital charge for insurance firms buying exchange-traded funds that track foreign bonds but are denominated in local currency
• The U.S. Justice Department has struck a deal with fugitive financier Jho Low to recoup almost a billion dollars looted from Malaysian investment fund 1MDB
  • Malaysia maintains claim of $7.5 billion from Goldman Sachs Group Inc. for the bank’s role in arranging bond sales for 1MDB, Finance Minister Lim Guan Eng said
  • The country expects its credit rating to remain stable in the near future due to institutional reform, resilient economic growth as well as clear and consistent messaging to investment community, finance minister said
  • U.S. is unlikely to label the nation a currency manipulator, Finance Minister Lim said
• Vietnam slapped five-year tariffs on Chinese and South Korean color-coated steel products after domestic producers said unfair pricing from overseas competitors caused them to shut down production lines

EMEA:

• South Africa’s government is talking with potential investors in the state-owned airline in an attempt to ease the continuing burden the company puts on the national budget
• Mozambique President Filipe Nyusi won a second term by a landslide in the natural-gas-rich nation’s Oct. 15 elections that the main opposition rejected as a “mega fraud”
• The Kenya National Assembly’s finance committee agreed to support President Uhuru Kenyatta’s decision to reject a bill that sought to retain caps on what banks can charge on loans, paving the way for the removal of a law that cut credit to businesses
• Russia’s biggest rate cut in two years was well flagged by Governor Elvira Nabiullina, but when it came, the move gave an extra boost to one of the strongest bond rallies in emerging markets this year, driving generic 10-year yields to their lowest since before the 2008 financial crisis
  • For all their talk about breaking Washington’s dominance, Russia and Turkey are still pretty hooked on the U.S. currency, according to data published by the Bank of Russia
• Turkey’s central bank lowered its inflation estimate for the end of this year to 12% from 13.9%, citing a faster-than-expected slowdown in food prices and a stable lira
  • Turkey offered to buy shares in Borsa Istanbul that the European Bank of Reconstruction and Development plans to sell following concerns over a convicted banker’s appointment to lead the benchmark stock exchange
• Bulgaria’s ruling party held on to the capital city in local elections, fighting off a challenge by the opposition-backed candidate
• Shares in Saudi state oil giant Aramco will start trading on the Middle Eastern country’s stock exchange on Dec. 11, television news channel Al Arabiya reported, without identifying the source for the information
  • The energy giant earned $68 billion in the first nine months of the year, cementing its position as the world’s most profitable company, according to people familiar with the figures
  • Saudi Arabia finally kicked off what could be the world’s biggest initial public offering, revealing potential tax cuts and dividends to lure investors
• Egypt said it picked five banks, including JPMorgan Chase & Co. and Citigroup Inc., to manage a new dollar-denominated bond issuance in the 2019-20 fiscal year
• A religious ruling in Kuwait against two initial public offerings launched in October is stirring fears that the Gulf state is clamming up at a time its bigger neighbor Saudi Arabia is doing just the opposite, courting investors in anticipation of Saudi Aramco’s IPO

Latin America:

• Argentina’s President-elect Alberto Fernandez has six weeks to put the pieces of his cabinet puzzle together before starting a government that will have no shortage of economic problems
  • Bonds slid after the vote and investors are now watching for the final composition of congress and how that may impact key legislation, including a debt restructuring
  • Aurelius Capital Management LP, one of the lead hedge funds that settled a massive litigation over defaulted bonds with Argentina in 2016, made a new claim in New York for $159 million it says the South American nation owes on securities tied to the performance of its economy
  • Argentina lowered the floor on its key interest rate while defending its latest round of capital controls as a way to ease the transition period until Fernandez takes office Dec. 10
  • Fernandez said he will put policies in place to boost manufacturing, including local textile and shoe producers
• Brazil’s central bank signaled it will stick with the current pace of monetary easing at its next meeting after lowering the key rate by a half point for the third straight time and forecasting inflation below target through 2021
  • Industrial output rose less than expected in September as capital goods production dropped for the fourth straight month, signaling companies are still reluctant to invest
  • Unemployment rate unexpectedly held steady in the three months through September amid an increase in the number of people seeking work
  • A Globo report on President Jair Bolsonaro being potentially linked to the murder of a lawmaker in Rio de Janeiro last year was quickly dismissed after prosecutors said that a key statement that supported the accusation was proved wrong during the investigation
  • Lower house Speaker Rodrigo Maia said the allegations do not “harm at all” the lower house agenda
  • Bolsonaro said he won’t attend the inauguration ceremony for his Argentine counterpart Fernandez in a fresh sign of souring ties between South America’s largest economies
• Mexico’s gross domestic product rose 0.1% in the third quarter from three months earlier, according to preliminary data -- that’s less than a 0.2% median analyst forecast
  • U.S. companies and trade groups that want lawmakers to approve a new trade pact with Mexico and Canada are making the unusual bet that the impeachment drama in Washington could actually help get the deal through Congress
  • House Speaker Nancy Pelosi said the new Nafta deal is the “easiest trade deal that we’ve ever done”
• Chile’s President Sebastian Pinera fired eight top officials, including the interior, finance and economy ministers, after 10 days of riots, protests and reprisals
  • More violence erupted in Chile and dozens of citizens have been partially blinded by rubber projectiles and gas canisters that police and soldiers fired into crowds of protesters
  • Many Chileans are clamoring for a solution that sends shivers down the spine of part of the country’s elite: a new Constitution
• Colombia’s central bank defied the emerging market trend for interest rate cuts and left borrowing costs unchanged at its October meeting
• Uruguay’s presidential candidate from the leftist coalition that’s governed the country for almost 15 years faces an uphill battle to win over at least part of the majority of voters who supported right-wing candidates in Sunday’s election before a November runoff
• Two people died in clashes over the results of Bolivia’s Oct. 20 election in the latest episode of political violence that’s flared across South America
• Venezuela gave El Salvadoran diplomats just 48 hours to leave the country after a similar move by El Salvador’s President Nayib Bukele

--With assistance from Selcuk Gokoluk and Carolina Wilson.

To contact Bloomberg News staff for this story: Yumi Teso in Bangkok at yteso1@bloomberg.net;Netty Ismail in Dubai at nismail3@bloomberg.net;Aline Oyamada in Sao Paulo at aoyamada3@bloomberg.net

To contact the editors responsible for this story: Tomoko Yamazaki at tyamazaki@bloomberg.net, Cormac Mullen

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